FX: Here’s Why its Going to be a Busy Week

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Daily FX Market Roundup 08.18.14

FX: Here’s Why its Going to be a Busy Week

EUR Retreats But Remains Trapped in Narrow Range

GBP: Hawkish Comments from BoE Carney Creates More Confusion

NZD: Beware of Another Dairy Auction

AUD: Hangs Tight Ahead of RBA Minutes

CAD: Extends Gains Despite Drop in Foreign Investment

JPY: 2 Pieces of Important Japanese Data

FX: Here’s Why its Going to be a Busy Week

It is going to be a busy week in the financial markets with market moving events expected from many parts of the world. Although the middle of August is generally one of the quietest periods in the markets, this year we expect more movement in currencies as investors search for clarity on global monetary policy. Over the weekend, Bank of England Governor Carney left investors more confused than ever when he said they might not need to wait for wages to rise before raising interest rates, which was at odds with last week’s dovish Quarterly Inflation Report. The European Central Bank is working on a plan to increase stimulus but how quickly they choose to do so hinges on incoming data. At the same time, investors want more clarity on how soon the Federal Reserve plans to raise interest rates once Quantitative Easing comes to an end.

Here are the 10 most important events to watch this week in order of release, some of which are discussed further below. For the U.S., the main focus will be on the FOMC minutes on Wednesday and Janet Yellen’s speech at Jackson Hole on Friday. A rebound in U.S. yields and higher NAHB Housing Market Index helped to put a bid in the dollar today and if tomorrow’s housing starts and building permit reports rebound strongly in July, it could promote a healthier recovery in U.S. assets. Some Fed officials have been talking about the need for an earlier rate hike so investors will also be looking to see if there is a more hawkish bias to the FOMC minutes. Finally Janet Yellen delivers the keynote speech at Jackson Hole on Friday and according to a study by the Wall Street Journal, the Fed Chairman’s speech at the event tends to be positive for stocks but unfortunately we did not see the same consistency let alone strength in the U.S. dollar. Thanks to the rebound in U.S. yields, rally in equities and positive economic data, the greenback traded higher against all of the major currencies.

10 Most Important Events to Watch this Week:

1. UK Consumer Price Index (Aug 19)

2. New Zealand Dairy Auction (Aug 19)

3. RBA Semi-Annual Testimony (Aug 19)

4. Bank of England Minutes (Aug 20)

5. FOMC Minutes (Aug 20)

6. HSBC China Manufacturing PMI Aug Flash (Aug 20)

7. Eurozone PMIs (Aug 21)

8. Canadian Retail Sales (Aug 21)

9. US Philadelphia Fed Index (Aug 22)

10. Yellen’s Speech at Jackson Hole (Aug 22)

EUR Retreats But Remains Trapped in Narrow Range

While the euro traded lower against the U.S. dollar today, it remains confined within an increasing narrow range. Given the abundance of U.S. and Eurozone event risks this week, a breakout is likely but it may not occur until the latter part of the week. Today’s sell-off was driven by mixed Eurozone data and a rebound in U.S. rates. The Eurozone trade surplus rose to 16.8B from 15.4B but on a seasonally adjusted basis, it shrank to 13.8B from 15.2B. Exports rose 3% compared to a 2% rise in imports but the details of the report show less demand from Russia. Tensions with Ukraine continue to grow with reports of heavy artillery action in the southern part of the country. As indicated in today’s trade data, the standoff with Russia has and will continue to take a toll on Eurozone economy, which stagnated in the second quarter. Many market participants have lowered their growth and inflation forecasts in response to the latest developments. For the Eurozone, the PMI reports are the most important event risks this week. If manufacturing and services activity slows further in the month of August, speculation of additional action from the ECB will grow, making it difficult for EUR/USD to hold above 1.33. Fundamentally, euro should be trading lower but positioning and technicals favor a bottom – it remains to be seen which will win out. The Eurozone’s current account balance is scheduled for release tomorrow and while the surplus shrank in May, it should remain at a lofty level, providing support to the euro.

GBP: Hawkish Comments from BoE Carney Creates More Confusion

The Bank of England is at it again, creating more confusion for FX traders. Over the weekend BoE Governor Mark Carney suggested that the central bank may not wait for wages to rise before raising interest rates, they just need to see evidence that a pay rise is likely. The tone of his interview with the Sunday Times this weekend is completely at odds with the dovish Quarterly Inflation Report where the central bank lowered its GDP and wage growth forecast. In the past, the BoE made it clear that tightening predicated on a decline in economic slack and increase in wages but today, Carney suggested otherwise. This tells us that even with the recent forecast downgrades, a number of MPC officials including Carney are actively thinking about raising rates. The mixed messages from policymakers makes this week’s Bank of England particularly important as investors will be watching closely to see if anyone dissented from the central bank’s decision to keep monetary policy unchanged. While Carney’s comments helped to lift sterling, investors will need more evidence either in the form of less dovish BoE minutes or stronger U.K. data to be convinced that the central bank is serious about raising rates before wages rise, starting with tomorrow’s consumer price report.

NZD: Beware of Another Dairy Auction

The Canadian and Australian dollars ended the day slightly higher against the greenback while the New Zealand dollar traded cautiously ahead of tomorrow’s dairy auction. The acceleration in service sector activity in New Zealand last month failed to have any lasting impact on NZD/USD because investors know that as long as dairy prices continue to fall, the outlook for the economy will worsen. The twice a month dairy auctions have become a big market mover for NZD/USD. The currency pair fell to 7 week lows after the last auction because prices dropped 8.4%, adding to a previous 8.9% decline. Since February prices are down 41%, which is disastrous for the country’s terms of trade and GDP because dairy accounts for approximately a third of New Zealand’s exports by value. Unless we have a big rebound in prices tomorrow, there’s a good chance Fonterra will lower its payout further this year. If prices fail to rebound, NZD/USD could drop back below its 200-day SMA of 0.8462. Aside from the dairy auction, producer prices for the second quarter are also scheduled for release and given the steadiness of CPI and decline in commodity prices, we are not looking for a significant uptick in price pressures. Thanks to the sharp upward revision in Canadian employment on Friday, the loonie extended its gains against the greenback despite a surprise decline in international securities transactions. A drop in Australian new motor vehicle sales had zero impact on AUD ahead of the RBA minutes. If you recall, the Reserve Bank kept interest rates on hold and left their monetary policy statement virtually unchanged earlier this month. The central bank has now kept rates steady for a year, the longest period since 2006. With the Australian dollar still viewed as too high by historical standards and the RBA feeling that it would “probably be some time yet before unemployment declines consistently,” the minutes will most likely signal steady policy for the remainder of the year.

JPY: 2 Pieces of Important Japanese Data

The Japanese Yen traded lower against all of the major currencies today with the exception of the euro and Swiss Franc. The rebound in U.S. yields helped to lift the yen crosses but fresh selling of European currencies prevented those pairs from participating in the move. Given the abundance of market moving data scheduled for release from the rest of the world, the Yen will most likely trade on risk appetite and demand for the other currencies. The most important pieces of Japanese data expected this week are the trade balance and manufacturing PMI index but as usual these reports will have a limited impact on the yen. Nonetheless they are important to watch because we want to make sure that there isn’t a further loss of momentum in the economy. Based on the consensus forecast, exports are expected to rebound in July with manufacturing activity accelerating slightly.

Kathy Lien
Managing Director

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